Peters Company produces golf discs which it normally sells to retailers for $7 e

Question

Peters Company produces golf discs which it normally sells to retailers for $7 each. The cost of manufacturing 20,000 golf discs is:

Materials $10,000

Labor $30,000

Variable overhead $20,000

Fixed overhead $40,000

Total $100,000

Peters also incurs 5% sales commission ($0.35) on each disc sold.
Wade Corporation offers Peters $4.75 per disc for 5,000 discs. Wade would sell the discs under its own brand name in foreign markets not yet served by Peters. If Peters accepts the offer, its fixed overhead will increase from $40,000 to $45,000 due to the purchase of a new imprinting machine. No sales commission will result from the special order.

(a) Prepare an incremental analysis for the special order.
(b) Should Gruner accept the special order? Why or why not?

(c) What assumptions underline the decision made in part (b)?

Explanation / Answer

a) incremental cost increase id $5000

b) revenue from 5000 discs = 5000x4.75 = 23,750

and additional cost for making these=5000

so he should accept the special order.

c) assupmtion is that he is ready to promote other brand.

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